Fed Official Says Bitcoin Not a Credible Threat to the Dollar, but Is That True?

Bitcoin may be the most groundbreaking asset in the market today, but it is no match for the U.S. dollar, according to Minneapolis Federal Reserve President Neel Kashkari.

 Not “Credible” Enough

In a public appearance in Minnesota Tuesday, Kashkari said bitcoin and other cryptocurrencies do not post a significant threat to traditional fiat system. In his view, virtually anyone can create their own coin, but none can replace the greenback as a universally accepted unit of exchange.

“I don’t see bitcoin as a credible competitor to the dollar in the United States of America, and the reason is the barrier of entry to you creating your own coin and me creating my own virtual currency … is zero,” he said, as quoted by CNBC.

Although Kashkari didn’t talk about volatility, those who share his views felt vindicated on Tuesday as the cryptocurrency market crashed. Bitcoin and hundreds of other digital currencies underwent a huge correction as South Korean regulatory fears dragged the market sharply lower. At its lowest point of the day, the total market cap lost around $190 billion.

Kashkari was a voting member of last year’s Federal Open Market Committee (FOMC), where he opposed raising interest rates. Investors refer to policymakers like him as “doves.”

Dollar vs. Bitcoin

Of course, Kashari’s sentiment is not unlike what you’d expect form government officials, mainstream media and traditional financiers. However, if the cryptocurrency revolution has demonstrated on thing, it’s that governments and big banks do not hold a monopoly over value. Just as the bitcoin protocol requires a consensus for any change to be implemented, its value is based on what people believe it is worth.

That’s not to say bitcoin isn’t or hasn’t been overpriced. Many people have made a compelling case why bitcoin is overvalued. But that in itself does not negate the power and possibility of a decentralized exchange system.

Kashkari is correct in implying that bitcoin isn’t universally accepted. Unlike the greenback, it has struggled for mainstream acceptance as a unit of exchange. That’s a problem the blockchain community is still sorting out.

That being said, bitcoin and other cryptos hold a number of advantages over fiat currencies like the dollar. For starters, bitcoin is decentralized, which means it gives power to common people rather than the big banks. We don’t need to elaborate on why this is a benefit to all of humanity.

Bitcoin’s appreciation is also far more attractive than the dollar’s inflation. Remember: rising prices are the affect of inflation, whereas inflation itself refers to an increase in the amount of currency available. The dollar’s value has declined sharply since the Second World War as more greenbacks entered circulation. So, while there are more dollars, they are worth less.

While bitcoin may have transaction issues, the token is much easier to transfer anywhere in the world. This is even true for large transfers, which usually take fiat money and the banks several days or more to process.

So, while bitcoin may not be a credible threat to the dollar at this stage, it or some other cryptocurrency like it may become a viable contender in the not-too-distant future. Central bankers may not realize this, but they have been keen to experiment with blockchain technology, bitcoin’s underlying infrastructure. This suggests the cryptocurrency revolution has something for everyone.

Disclaimer: The author owns bitcoin, Ethereum and other cryptocurrencies. He holds investment positions in the coins, but does not engage in short-term or day-trading.

Featured image courtesy of Shutterstock. 

Chief Editor to Hacked.com and Contributor to CCN.com, Sam Bourgi has spent the past nine years focused on economics, markets and cryptocurrencies. His work has been featured in and cited by some of the world's leading newscasts, including Barron's, CBOE and Forbes. Avid crypto watchers and those with a libertarian persuasion can follow him on twitter at @hsbourgi